I've considered that approach too. How do you calculate your quarterly payments? Do you use tax software, or is there some formula you follow? And do you ever worry about underpayment penalties if your estimates are off?

I use last year's total tax as my safe harbor amount (which avoids penalties as long as you pay at least 100% or 110% of prior year tax, depending on your income level). I take that amount, subtract what will be withheld through our regular paychecks, and divide the remainder by 4 for each quarterly payment. I track it in a simple spreadsheet. For example, if last year's tax was $52,000, and I expect about $40,000 to be withheld through payroll, I'll make quarterly payments of $3,000 each ($12,000 ÷ 4). This approach completely eliminates underpayment penalties as long as you hit that safe harbor amount.

This is exactly right. I'm a payroll specialist and see this all the time with higher-income couples. The withholding system was really designed for single-income households or situations where one income is significantly higher than the other. When you have two high earners, the tables just don't work correctly.

Thanks for confirming! My accountant also mentioned that the 2020 W4 redesign was supposed to help with this, but most people don't know how to fill it out correctly for dual-income situations. Apparently there's a special worksheet for two-income families that many people skip.

Wait, I thought Section 1231 losses always get ordinary loss treatment regardless of holding period? Isn't the 1 year+ holding period just for determining if gains get capital gains treatment? I've been doing my taxes wrong if that's not the case!

You're right that Section 1231 losses are treated as ordinary losses regardless of holding period. I should have been more precise in my explanation. What I was referring to is that to qualify as Section 1231 property in the first place, the property must be used in a trade or business and held for more than 1 year. Since the OP has held it for 2 years as a rental, it qualifies as Section 1231 property. If it had been held for 1 year or less as a rental, it wouldn't qualify for Section 1231 treatment, and would instead be subject to ordinary income/loss rules for property not used in a trade or business.

I actually haven't heard of cost segregation before. That sounds really useful! Is it something I could still do now even though I've already been depreciating the property as a whole for 2 years? Or is it too late to change how I've been handling the depreciation?

But aren't there legitimate advantages to being a contractor? I've heard you can deduct all kinds of things as business expenses - home office, car, phone, even meals sometimes. Couldn't those deductions make up for the extra taxes?

There are some legitimate advantages to being a contractor, but they rarely outweigh the costs for most workers. Yes, you can deduct business expenses, but there are strict rules about what qualifies. Home office deductions require exclusive use of that space for business. Vehicle deductions only apply to business use, not personal or commuting. Meal deductions are limited to 50% and must be directly related to business. These deductions rarely offset the additional 7.65% self-employment tax burden, loss of unemployment benefits, lack of workers' comp protection, no paid time off, and no employer-provided health insurance. Plus, you take on all the administrative burden of tax filings, estimated quarterly payments, and keeping meticulous records. For most personal assistants, employee status is financially advantageous unless the contractor rate is significantly higher.

The 20-factor test is actually outdated. The IRS now uses a simplified approach with three categories: Behavioral Control, Financial Control, and Relationship of the Parties. Much easier to understand than the old system. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

This is super helpful! Does this ordering change at all depending on whether you're dealing with federal vs. state tax issues? I'm trying to figure out where state tax court decisions fit in this hierarchy.

Great question! For state tax issues, you'd have a parallel hierarchy, starting with the State Constitution, then State Statutes, State Regulations, State Revenue Rulings, etc. For conflicts between federal and state tax law, federal law generally prevails due to the Supremacy Clause of the U.S. Constitution, but states have significant autonomy in creating their own tax systems. State tax court decisions would only be authoritative for that state's tax laws and wouldn't impact federal tax law interpretation.

IRS Notices and Announcements generally fall below Revenue Procedures in the hierarchy. They're considered "official pronouncements of tax policy" but don't have the same weight as Revenue Rulings or Revenue Procedures. That said, Notice 2020-75 specifically is pretty influential regarding state and local tax (SALT) workarounds since it announced the Treasury's intent to issue regulations on a particular matter. If your tax preparer is citing it, it's probably relevant to your situation, but just know that if it ever directly conflicted with a statute or regulation, those higher sources would prevail.

That's a really good question! I've actually been wondering about that too. My initial plan was to have everything under one LLC for simplicity, but now I'm second-guessing if that's the best approach. Did your tax person explain any specific benefits to having them separate?

The main reason he gave was liability protection. If someone sues your property management business, they could potentially go after your personally owned properties if they're in the same LLC. With separate LLCs, there's a stronger legal separation. From a tax perspective, he mentioned it can be cleaner for accounting and if you ever want to sell either business. Also said it might give more flexibility with how you handle certain deductions and expenses. The downside is more paperwork and potentially higher costs for maintaining multiple LLCs depending on your state.

This is super important! I learned this the hard way in California. Was managing just two properties for family members and got hit with a fine because I didn't have the required real estate license. Rules vary by state but better to check before you get too far along.